In the movie The Prestige, Michael Caine playing Cutter, explains the phases of a magic illusion: “Every great magic trick consists of three parts or acts. The first part is called “The Pledge”. The magician shows you something ordinary: a deck of cards, a bird or a man. He shows you this object. Perhaps he asks you to inspect it to see if it is indeed real, unaltered, normal. But of course... it probably isn’t. The second act is called “The Turn”. The magician takes the ordinary something and makes it do something extraordinary. Now you’re looking for the secret... but you won’t find it, because of course you’re not really looking. You don’t really want to know. You want to be fooled. But you wouldn’t clap yet. Because making something disappear isn’t enough; you have to bring it back. That’s why every magic trick has a third act, the hardest part, the part we call “The Prestige”.”
In business, several leaders take the tough and true path to build enduring companies and great businesses. But some business leaders prefer the sleight-of-hand. They go for the big show but when they find they are running out of runway, they rely on deception and illusion. The HBO documentary The Inventor tells the story of Theranos and its young and ambitious founder Elizabeth Holmes. It is a must-watch for leaders and entrepreneurs. Theranos, once worth about $9 billion is today worth nothing.
Holmes wooed and feted by investors, politicians, social activists, and healthcare professionals was earlier this month convicted on four out of the 11 charges brought against her including fraud. She could be facing up to 20 years in prison. It’s a cautionary tale for leaders who want to weave their magic but end up building castles in the air, castles that then come crashing down.
This is the storytelling phase. Elizabeth Holmes was a master storyteller. The miracle of preventive healthcare is possible from just a few drops of blood. The power of an Edison, the sleek black box that supposedly crammed all the mammoth lab equipment into the magical cuboid that could sit on your kitchen table — the power of your health in your hands. The story was inspiring — it promised better quality, at lower prices, over 200 tests from just a container of blood (traditional labs still draw a much larger quantity of blood from the vein), a pinprick instead of the needle stab.
Her personal charisma, the power of her vision, and the compelling way she told it had some of the smartest people in the world hooked — from fawning interviews with Bill Clinton to former Cabinet members George Shultz and Henry Kissinger to General James Mattis creating the Silicon Valley gold-star board and network. Very often the story is tied to a universally acknowledged good. People love to be involved with something that has a ‘higher purpose’ but strangely they feel less worried about cutting corners.
Crypto companies and their founders went down this path — promising returns that were unreal, making comparisons with real assets that were plain wrong, and building a flaky business of people’s aspirations to get rich quick. Charlie Munger does not hide his dismay.
“Believe me, the people who are getting into cryptocurrencies are not thinking about the customer, they’re thinking about themselves. Just look at them. I wouldn’t want any one of them to marry into my family.”Charlie Munger
This is when the magic seems to happen right in front of your eyes. Crypto companies’ tom-tom stories of early-bird investors who invested ₹25,000 and made over a million. Pre-IPO, we see founders stretch the limits of truth and credulity with claims to push up their stock price. Elizabeth Holmes promised to revolutionise diagnostic healthcare. Walgreens went ahead and signed a deal with Theranos to roll out clinics in their stores — this — without even looking inside the Edison box.
They had fallen for ‘the turn’. Theranos was selling the ‘stick test’ but in reality, was doing the traditional vein-draw and running over 90 per cent of the tests on regular third-party lab equipment, not on the Edison which they claimed was their magic box.
This is when business teams create multi-million or multi-billion-dollar valuations, get on the cover of all the best business magazines and have investors and a moonstruck public swooning. But behind all the hype is vapourware. In some cases, this starts off as a genuine attempt at the Silicon Valley mantra of ‘fake it till you make it”. Some of this is understandable. Start-ups could never grow or scale if their reach did not exceed their grasp. At Theranos, seasoned investors like Rupert Murdoch, Larry Ellison, Tim Draper, all believed, even though all the evidence and facts pointed in the opposite direction.
To use the magician’s parallel — the evidence had disappeared, but they waited with hope and anticipation for the ‘Prestige’. The Wall Street Journal prevented the Prestige with a damning article that called out the hoax. Every business leader must remember Abraham Lincoln’s famous advice: “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people, all the time”
How can leaders prevent this?
For one, they need to ensure their confidence does not brim over into over-confidence, bordering on megalomania. Next, they need to surround themselves with people unafraid to tell them the truth. A few tell-tale warning signs — when criticism is seen as an attack. We see that in our country today where any criticism of the government can see you branded as anti-national. We’re seeing some early warning signs at Tesla.
An article about Tesla from a former fan highlighted this. “But in recent years, the CEO has almost exclusively been interacting only with a group of Tesla superfans who are almost entirely suppressing criticism and creating an atmosphere where people are not encouraged to communicate legitimate criticism of Tesla. These superfans portray most, if not all, criticism as “attacks” on Tesla, and now, Musk seems to agree.”
In the documentary on Theranos, every criticism is portrayed by Holmes and her associate ‘Sunny’ Balwani as “we are under attack”. That’s when feedback ceases, danger signals are not listened to, and a distorted reality is constructed. Leaders must also set up their own tripwires to know when an idea, an experiment, a project is not working. Persistence is a virtue but not when it veers off track into deception.
The slide to the illusion begins slowly and small — a little white lie, a tiny compromise, but soon the lying and the compromising become so constant and ubiquitous that the lines separating truth and illusion blur and then entirely disappear. Real leaders know that one time is too many. As Clayton M Christensen so powerfully put it: “It’s easier to stick with your principles 100 per cent of the time rather than 98 per cent of the time.”